June 25, 1984
Summary
Business expansion continues in the Seventh District, but distinct
signs in the past four to six weeks indicate that the pace of the
rise in activity moderated significantly in the second quarter.
Slowing was most marked in residential transactions, both on new and
previously-owned structures, where higher interest rates have had
their greatest impact. However, slower growth or declines also were
noted in demand for steel, nonferrous metals, paper products,
building materials, retail trade, and rail traffic. Motor vehicle
sales, on the other hand, continue to be limited by availability of
preferred models. Except for housing and a few specialized
components and products, informed observers do not expect a general
economic letdown. There are no signs of panic over a cutoff of
Persian Gulf oil, upcoming UAW contract negotiations, or financial
crises, domestic or international. A major factor in the slowing in
the upswing is a moderating push to build inventories now that most
"pipelines" have been refilled. Concern over accelerating inflation
has abated, with widespread evidence of stiff competition. Demand
for mechanical capital goods has increased, but only "selectively"
and to levels generally below, often far below, "good" levels of the
past. Employment increases continue but remain disappointing in the
District, especially in nonmanufacturing. In the agricultural
sector, District farmers caught up on plantings by mid-June,
overcoming weather- caused delays earlier in the season.
Chicago and Milwaukee
Purchasing managers in the Chicago and Milwaukee areas reported
slower growth in output and orders in April and May. However, order
leadtimes continued to lengthen and the pace of the rise in
employment remained strong. Both groups characterized their May
reports as indicating continued growth for their areas, but at a
slower pace.
Housing
Residential transactions have declined and a slump in new activity
is believed to be underway, although not yet clearly indicated by
available data. Quoted rates on conventional loans have increased,
to as high as 15 percent. from 13 percent last spring, thereby
pushing some potential buyers from the market. Also, lenders have
tightened standards. A group of Chicago-area suburban builders
reported new contracts down by half from March to May. There is
little development work on new subdivisions in anticipation of a
revival of demand. ARMs are being used extensively, exclusively by
some lenders, but there is concern that some borrowers have been
qualified on the basis of artificially low initial rates. Private
mortgage insurers and some lenders have taken steps to stop this
practice. Inflows of funds to S&Ls are holding up well, but a
large share of these funds is being diverted into governments. S&Ls are making some consumer installment loans, but few have used
their authority to enter the unfamiliar field of business loans.
Building Costs
Prices of most residential building materials have increased
substantially since the uptrend in construction got underway late in
1982. Meanwhile, most building trades workers have agreed to wage
freezes for the second straight year, both because unemployment
remains substantial and because of inroads by nonunion contractors.
Higher prices for such items as lumber, gypsum board, and building
hardware brought forth additional supplies, thereby permitting some
failback In prices. In the past month, there has been a dramatic
change in the gypsum board market. Early in the spring local
shortages of gypsum board were inducing shipments from domestic
areas where supplies were less stringent and from abroad—Canada,
Mexico, and Europe. Suddenly, shortages have disappeared and the
industry is no longer operating at capacity. The main reason for the
abrupt change is not a drop in consumption, which remains high, but
an end to the inventory buildup by builders and distributors who had
feared spreading shortages. From now on, usage of gypsum board in
residential work is expected to peak out and decline, while
commercial usage continues to rise.
Retail Sales
District observers question the accuracy of the small estimated 0.2
percent rise in total retail sales for May. Nonetheless, they report
general merchandise sales somewhat below budget in recent months.
Disappointment has centered on sales of soft goods, especially
apparel. Although demand for home computers has sagged, rather than
increased as expected, sales of traditional hard goods—most
appliances, home improvement items, and recreational equipment—have
been excellent. Hot weather in June brought a surge in air
conditioner sales and some spot shortages. Overall, retail
inventories are characterized as ranging from adequate to somewhat
excessive. Prices paid remain in check, partly because of pressures
exerted on suppliers by large chains with multiple sources for most
items, domestic and foreign.
Capital Equipment
The mechanical capital goods picture has not changed substantially
from evaluations offered in earlier "commentaries". Output of heavy
trucks and trailers remains at capacity with backlogs extending into
1985. Heavy truck capacity, which had been reduced in the recession,
is not being rebuilt. Orders for locomotives and freight cars have
increased, and are expected to continue to increase, but remain far
below prosperous levels. Demand for construction equipment and farm
equipment is only slightly improved. Machine tool orders are up
substantially, but with shipments still deeply depressed, cash flow
to this industry remains perilously low. Other classes of capital
goods with selective gains include oil and gas development, water
transport, food processing, and materials handling. Equipment for
mining coal, metallic ores, and agricultural minerals remains near
recession lows. Except for paper, U.S. industry's capital outlays in
1964 are heavily concentrated in replacement and modernization
rather than expansion. District capital goods producers continue to
lament sharp declines in export markets, which are not reviving.
Steel
Leadtimes on steel orders have shortened, partly reflecting the
maturing of inventory rebuilding programs in the auto, capital
goods, and construction industries, and in steel service centers.
Unlike last year, when the July dropoff in steel shipments was less
than seasonal, most steel users this year will take their usual July
plant-wide summer vacations. inventory positions then will be
closely evaluated, a difficult process when operations are in full
swing. Forecasts far steel consumption and shipments have not been
altered and continue to call for substantial gains this year.
Pressure for effective restrictions on steel imports, including
those from LDC nations, are very strong. Despite anti-dumping rules,
imports have hit new highs this year. Foreign steel is much less
important in the District than nationally, but its availability
helps keep prices at depressed levels.
Motor Vehicles
Aggregate data on car and truck output and sales suggest erratic
performance this year, with a general leveling. Actually, marker
vigor is undiminished. Sales data reflect shortages of fuel- and
medium-sized cars, some sports models, heavy duty trucks, and some
light trucks and vans. The motor vehicles picture has also confused
by the end of the Japanese quota year on April 1, and some early
U.S. car model changeovers.
Crops Largely Planted
After a slow start, crop plantings are being completed a few days
sooner than last year and on schedule with historical norms. As of
June 10, virtually all of the District's intended corn acreage and
about 85 percent of its soybean acreage had been planted. Initial
crop stands are mostly rated "good". Weather patterns in July and
early August, however, will be the major determinant of ultimate
harvests.